Friday, June 30, 2017

Future of MC-21 revolves around Russian protectionist measures

During a recent meeting with ministers held in the city of Ulyanovsk, Russian Prime Minister Dmitry Medvedev paid a great deal of attention to the expansion of MC-21 sales at home. The solution he suggests is simple albeit unconventional for today’s market economies – create favorable conditions for domestic airlines to buy indigenous planes, thus nudging them towards the aircraft designed to compete with Airbus and Boeing models. Is the youngest of Irkut’s children destined to grow up in a bubble and never leave the shadow of the big league players?

The MC-21 is what’s best for Russian airlines, is a decision made not by the carriers themselves but by the higher-ups, probably years before the maiden flight took place. The recent announcement in Ulyanovsk once again shows that Russia might still be wearing Soviet-era goggles when it comes to developing its aerospace industry.

Here is how Russian protectionism works (or doesn’t). The government suggests Russian airlines part ways with their old aircraft and get a hefty discount on the brand new MC-21. The carriers oblige and expand their fleet with some homegrown airliners. This, of course, increases the demand for Russian-made aviation equipment but the demand is limited to… that’s right, Russia. So far, Russia has not made strides in competing in foreign markets, even with Iran – a relative friend – being hesitant to choose Russian planes over better-established counterparts from the US and Europe.Good old Russian bubbles

The un-mistakenly protectionist vision of the prime minister goes in line with the import substitution industrialization (ISI) policy, which has deep roots in Russia. Such measures are adopted only by a handful of countries (mostly in Latin America), but government officials in Russia still argue that domestic production should substitute imported goods if possible as it would curb foreign dependency and boost self-sufficiency (not to mention some egos).

The growing prevalence of ISI in Russia is often claimed to be the result of several factors, including, but not limited to: price fall of one of the main exports of the country – oil, consequently, the fall of Russian ruble, economic and trade sanctions imposed by the US and EU as well as Russia’s countermeasures to the latter actions – embargo on a massive chunk of imported food product market.

One of the major sectors where Russia has already experimented with ISI is the automotive industry, which indirectly involves more than 2,000,000 workers. To this day, the industry is affected by economic incentives, started in the 2000s, such as reduced customs tariffs for raw materials and components used in the industry. These, however, should soon become a thing of the past, with Russia having to comply with WTO rulings.

Let’s not forget Russia’s ambitious plan to triple its market share in the sector of commercial aircraft production from the 1% it occupies at the moment. The domestic market, although capable of boosting production rates, will not be enough to hit the target, which is understood by the Russian government itself. The ten-year plan published by the United Aircraft Corporation (the umbrella company of Russia’s civil aerospace industry) lists the following drawbacks it faces: outdated production model, low labor efficiency and the lack of private funding. With the clock ticking and the competitors not sleeping, an over-dependence on protectionist measures might not be the best way to play this hand of poker.

The MC-21 is a narrow-body airliner produced by Irkut. The plane will come in two variants, the shortened MC-21-200 seating 132-165 passengers, and the standard MC-21-300 seating 163-211 passengers. The aircraft can be equipped with either indigenous in-development PD-14 or Canadian P&W PW1400G turbofan engines. The MC-21 aircraft are valued at $80 million at list prices.